Impact of digital lending rules on borrowing

In September 2022, the Reserve Bank of India (RBI) issued new guidance to regulate digital lending practices in India. The new guidelines introduced various changes including imposing restrictions on existing loan disbursements and repayments, banning credits on e-wallets, and regulating the collection of fees by lending apps. , which mandates reporting of all digital loans to credit bureaus, regulates the collection and use of customer data by financial technology companies, and restricts default guarantees for the first time (FLDG).

As the watchdog of the lending ecosystem in India, RBI emphasizes the need for digital lenders to ensure complete transparency while offering products through its digital platform. digital. Banks and non-banking finance companies (NBFCs) will be responsible for compliance with all regulations (including those relating to customer protection and product transparency), regardless of the involvement of third parties in the credit facilitation process. Recently, the governor of RBI met with select fintech companies and conveyed that they will continue to adopt a participatory and consultative approach to facilitate innovation in the financial services sector.

Sort FLDG: FLDG involves regulated lenders such as banks and NBFCs hedging their credit risk through fintech companies that help them source customers for their lending products. Typically, FLDG arrangements will involve a contractual commitment by fintech companies to compensate lenders for defaults in their loan portfolios, as well as provide collateral (cash, mortgage-marked fixed deposits, etc.) to the lender. The RBI is not mistaken in its concern that the FLDG amenity practice could pose systemic risk to the entire ecosystem. This is because lenders rely solely on the power of FLDG comfort provided by unregulated fintech companies.

However, the impact of restricting FLDG agreements on the market is huge and should be subject to regulatory review. Comprehensive restriction on FLDG arrangements without viable alternatives could derail the growth of India’s digital lending and financial inclusion efforts, and indirectly increase the cost of borrowing for consumers. This could also negatively impact seamless sourcing of borrowers by regulated lenders through fintech companies and digital lending platforms. Customers may also be affected as lenders may re-adjust their loan products, which can affect loan sizes, terms, and prices for those products.

The capital flow conundrum: Under new digital lending guidelines, the RBI has discouraged the use of group accounts while routing loan disbursements and repayments. A lot of market participants have relied on services provided by intermediaries, such as payment aggregators, for capital mobility. For example, when a customer has to repay a loan through a digital lending platform, the platform will integrate with a payment aggregator to provide different digital payment methods to customers. loan payment. This would require repayment flows to be routed through that payment aggregator, which will pool funds in its escrow account and settle them with the lender.

However, it seems likely that such arrangements will be banned in the future as the RBI has stipulated that all cash flows must be made directly between customers and lenders. This will adversely affect retail consumers as the process and user experience during loan payments can become cumbersome without the involvement of payment aggregators.

RBI has also restricted lending to customer-maintained e-wallets. This has affected many consumers who have used customized products offered by digital lenders based on specific use cases (involving their use of wallets or prepaid cards). for retail purchases through flexible credit options).

All things considered, it’s hard to escape the conclusion that the new digital lending guidelines limit the role of fintech companies in facilitating the delivery of lending products. digital for Indian consumers. For the industry to grow and prosper in the future, proper regulatory clarity to address such issues is imperative to sustain the innovative digital user experiences that fintech companies deliver.

Prashanth Ramdas is a partner and Pritish Mishra is a senior associate at Khaitan & Co.

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